Personal Finance Software

I use a well-known big-name Personal Financial software package to track a few the household expenditure which includes a few small shareholdings, thereby hangs a tale…

In Australia, companies can pay Franked Dividends.

When the statement arrives you get three numbers on it:

- the first number is the Franked Amount. This is the amount of cash you get, on which the company has paid tax.

- the second number is the Unfranked Amount. This is the amount of cash you get, on which the company HAS NOT paid tax.

- the third number is the Franking Credit, sometimes called the Imputation Credit.

Most companies pay Franked Dividends which makes the discussion that follows a little easier to follow – ignore the Unfranked Dividends.

The treatment of these numbers is important for tax purposes. There is an important principle here of avoiding double taxation. The Franked Amount represents a payment after company tax has been paid, and the amount of company tax that was paid is the Franking Credit.

So…

If your personal income tax rate is the same as the company tax rate, there is no more tax to pay.

If your personal income tax rate is less than the company tax rate, it means that too much tax has been paid, and you get some back from the tax office.

If your personal income tax rate is more than the company tax rate, it means that you need to pay a bit more.

Here is a practical example. Suppose a company has a profit of $100, and they pay tax at the company tax rate of 30%. This means they pay $30 in tax, and that leaves $70 for you.

Your dividend statement shows a cash payment of $70, and a franking credit of $30.

Suppose my personal income tax rate is 20%. This means the amount of tax I should pay on the earnings of the company (in my hands) is only $20. Seeing as $30 was paid in tax before I got my hands on it, the tax office owes me $10. That is why it is important to record and enter the franking credits on your tax return.

Suppose my personal income tax rate is 40%. This means the amount of tax I should pay on the earnings of the company (in my hands) is $40. Seeing as $30 was paid in tax before I got my hands on it, I owe the tax office $10.

The way the tax office work out what you need to pay (or they pay to you) is easy:

Step 1: Add the franked amount and the franking credit, and add these to your other income sources.

Step 2: Work out the amount of tax your have to pay based on the sliding scale (this means it works out the amount of tax to be paid on the earnings of the company, in your hands.)

Step 3: Give you a credit for the Franked Amount.

Using the above example, add $70 and $30, gives $100 (the earnings of the company, in my hands). Based on my tax rate, work out that the tax on the $100 is (say) $20. Levy that tax against me. (I owe $20.) Now give me a credit for the tax that was paid ($30). Result: tax office owes me $10.

So far this is all lovely, the tax forms and guide make it all clear.

Now… when I use the big name Personal Financial package it does something really dumb.

This program works on the idea of transactions, and categories for each transaction. It is not an accounting package, though it has a few similarities.

The package sold in Australia is an Australianised version that has been adapted from an American package (and that is the cause of its fatal flaw – they do not have Franked Dividends in America).

When I enter a Franked Dividend into the packageit ADDS the Franked Amount and the Franking Credit, and enters that as an earning amount, into a category called “Franked Dividends” (blarp – wrong – it should be called something else!!).

It then enters a second transaction, being the Franking Credit, as an expense amount, into a category called “Franking Credits”.

These two transactions are its means of capturing the two amounts into two categories – but notice that the earnings amount has the Franking Credits ADDED on…

When you generate a tax report to take to your accountant or to use yourself, it just totals up the figures in the categories.

So… using the example above, the package tells you that you have a Franked amount of $100, and a Franking Credit of $30.

What does any normal person do…

They enter Franked Amount $100, Franking Credit $30 into their tax return (even though they only received $70!!!).

Using the example above of the 20% tax rate, this means that the tax office calculates the income as $100 + $30 (=$130). Tax payable on $130 at 20% = $26. Tax paid = $30. Refund from tax office = $4.

You can see that this package, by presenting misleading figures in its reports, leads to people innocently paying more tax than they should. You only find this by manually adding up your statements at tax time to check that the package has done it right…. but nobody does that, because we trust the computer.

How many people are paying too much tax because of this stuff-up

Seeing as there is only an install guide and a CD in the box when you buy it, isn’t it time for the manufacturers to write to all registered users, and tell them how to use the package?

How many taxpayers need to lodge amended returns?

Leave a Comment

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Live Comment Preview

Comment by Somebody

Powered by WordPress 2.8    Rendered in 29 queries and 0.674 seconds.    CleanBreeze Theme